Obviously, trade war jitters are still front and center despite the fact that this week was dominated by idiosyncratic risk in the tech space.
One thing you should note about the tech turmoil that abated on Thursday but that dominated the tape on Tuesday and Wednesday is that with the exception of Tesla, the trouble that some of the market’s “darlings” have run into of late has a certain Trump-ish flavor to it.
For one thing, part of the problem for tech this week was the uncertainty swirling around reports that the Trump administration is set to take aim at China’s “Made in China 2025” initiative, which will ostensibly catapult the country into a leadership role in industries like IT, robotics, aerospace, rail, new-energy vehicles, bio-medical and (somewhat separately), AI.
“Rising trade tensions reflect that as China moves up the value-added chain its economy is becoming less complementary to the U.S. and more directly competitive,” TCW’s David Loevinger told Bloomberg earlier this week, adding that “‘Made in China 2025’ is part an effort to leapfrog the U.S. in some industries.”
Clearly, any effort to stymie that from Trump would invite retaliatory measures, raising the trade stakes even further, and putting the focus even more squarely on tech, etc. etc.
Additionally, the Facebook drama (i.e. the Cambridge Analytica debacle), further suggests that the American public was manipulated in the lead up to the election and while I won’t launch into a diatribe about that here, the whole thing stinks to high heaven and the further down the rabbit hole lawmakers get on that, the more we’re going to discover about how social media was used in the service of effectively brainwashing vulnerable corners of the electorate.
Finally, the Amazon drama is back and that’s directly related to Donald Trump and his long-running “obsession” with Jeff Bezos (who is actually a billionaire, unlike the President) and the Washington Post.
So again, the focus was on tech this week, but it’s important to keep in mind that part of the problem for tech was related to the simmering trade dispute between Washington and Beijing and all of this (trade wars, tech turmoil, etc.) is in one way or another related to Donald Trump (except for Tesla – I guess we can’t blame that on the President).
One certainly imagines the trade war headlines will be a fixture of the news cycle for the foreseeable future and market participants are still trying to figure out exactly how to hedge against an escalation. The consensus seems to be that equities are going to be the first thing hit and therefore, equity vol. is likely to be where any further escalation shows up.
Ok, so given that this is almost certainly going to be back on everyone’s radar next week (although again, it never left the radar, it just got lost in the FANG headlines), this is probably a good time to take a look at some updated scenarios.
Earlier this month, we brought you some highlights from Deutsche Bank’s attempt to game out China’s options for responding and today, we bring you the following straightforward (and thus easy on the brain on a holiday Friday) take from BNP.
The possibility of an expanded and ugly trade war cannot be ruled out. However, we believe it is far more likely that the US administration will use the threat of trade wars as leverage to achieve a negotiated outcome. We see the following scenarios:
- Base case (70% probability): Negotiated outcomes: some additional sector/product-specific tariffs and import quotas are introduced, along with a measured response from China. China agrees to substantial changes in IP laws and agrees to improve future IP practices. The Trump administration will hail it as a victory but will continue efforts to undermine technology transfer to China and put pressure for more RMB appreciation.
- New trade deal (10% probability): This is a least likely outcome, and possibly most friendly for risk. China and the US enter a negotiated solution, with specific targets/commitments to balance bilateral trade, intellectual property and market access issues
- No deal/trade war (20% probability). The Trump administration carries through with either tariffs and/or investment restrictions. Chinese retaliation leads to further US reactions, and global trade growth slows down dramatically. Under the first and second scenarios, the USD weakens; RMB and other Asian currencies will likely extend gains, as Asian governments attempt to mollify US pressure by accepting stronger currencies as part of a package of concessions to maintain market access. While some tariffs are likely to be implemented, their scale may be small relative to the overall macro picture. On the other hand, the third more extreme scenario is likely to be one of risk-aversion in equity markets, and steep losses in the cyclical Asian currencies due to fears of a collapse in the international trade order.